Havells: Lighting up again

Improving industrial demand, launches, panel report on pay increase, will aid the company

After hitting its 17-month low of Rs 235.6 on November 9, the Havells India stock has recovered almost 25 per cent. The reversal is fuelled by factors such as seventh-pay-commission report on hike (expected to boost spending by government employees), uptick in industrial demand, and improving health of its Europe-based subsidiary (Sylvania). These factors should help the company reverse the weak financial performance it posted in the first half of this financial year.

(Havells is an India-based electrical and power distribution equipment maker.)

In India, higher wages for government employees, push to affordable housing, and increased government spending is seen as boosting demand for Havells' products across segments. The company has stepped up product innovation, which should aid consumer durables (a fifth of FY15 domestic revenues) and switchgears (24 per cent of revenues). Havells' success in launching products like water heaters, electric switches, designer fans, and LED (light-emitting diode) fittings, has made it a household name.

The company has adopted a uniform discount policy, doing away with extra discounts to large distributors. This could help it gain favour with smaller distributors. Analysts at Ambit Capital believe this discount policy will aid profit and working capital. Improving industrial demand will favour Havells' cables (42 per cent of revenues) and lighting (14 per cent of revenues).

Its Europe-based Sylvania is seeing better times. Sylvania's net debt fell to ^27 million at the end of the September quarter. Its profit is seen improving going ahead. As a result, Havells may not make further investments in Sylvania. Havells plans to use the surplus cash for dividends and/or the domestic business. Analysts believe Havells' stand-alone return-on-equity ratio can improve from 21 per cent in FY15 to 24 per cent by FY18.

The company expects its FY16 second-half performance to be better than that in the first half — part of this could be due to low base-effect. Havells' debt-free balance sheet, improving return ratios, strong distribution, and market-positioning, are reasons most analysts remain positive on the stock.

At Thursday's closing price of Rs 293.6, Havells trades at 27 times FY17 estimated earnings, about 10 per cent lower than its historical average one-year forward price-to-earnings ratio of 30.